Its existence is foreshadowed in the Ruins near the beginning of the Genocide Route, with the first instance of the route's red text.[1] Name-wise, it contrasts with the Toy Knife found in the Ruins.

Trivia

If the Real Knife is hacked into the inventory on a non-Genocide Route and is equipped, most monsters can be spared on the first turn (even most non-spareable monsters), noting that the monsters fear the hostile nature of the weapon.

The existence of this item may be a reference to a rumor from the Undertale Demo, which stated that in contrast to the Toy Knife (which is obtainable normally in the demo and the final game in the same place), a Real Knife was supposedly able to be found somewhere depending on the protagonist's actions. The item's Steam Badge description, "A symbol of the bond between player and character.", makes a callback to this rumor.

Within the context of the final game, this bond may refer to the bond between the player and the first human, as together the entire world can be erased, something which cannot be performed by either entity alone.

Despite being the strongest weapon in the game, it (intentionally) never sees any real use without hacking as the last enemy has only 1 HP. The same applies to The Locket, the strongest armor in the game (as the last enemy can only deal 1 damage per hit).

It is heavily implied that the Real Knife and the Worn Dagger are the same item, but since the protagonist has a higher LOVE in Genocide, it is described as a killing tool rather than a gardening tool.

References

↑Where are the knives. – The protagonist examining the kitchen drawer at Home